Investors in retail stocks seem to be expecting a rebound in the festival season that lies ahead. Retail companies had faced the brunt of the economic slowdown, as consumers cut back on discretionary spending. Will retailers recover lost ground in the next few quarters?
Investors seem to think so. Retail stocks such as Pantaloon Retail (India) Ltd and Trent Ltd are up by 14% and 10%, respectively, from their levels a month ago, while Shoppers Stop Ltd is up by nearly 50%.
Consumers in urban and semi-urban areas cut back on spending in the past year, as stock markets fell, the job market turned weak and general consumer confidence was hit. The downturn hit the lifestyle part of the retailing business hard, while food retailing was relatively less affected. Consumers cut back on discretionary spending, forcing retailers to hold extended discount sales to encourage them to shop. In the June quarter, Shoppers Stop same store sales declined by 6%. Trent reported an 8% decline in overall sales growth during the quarter. Pantaloon seems to have done relatively better, with its investor update on store-level sales indicating a 7% growth during the quarter. It will declare its June quarter and full year results by the end of September. Pantaloon gets a large portion of its sales from non-lifestyle segments, unlike the other two firms mentioned above.
Now that the business environment is improving and stock markets have moved up, the expectation is that shoppers will return.
The recovery in the automobile sector is also evidence that consumer confidence is returning. But that alone is not enough for a recovery for retailers. Most went on a frenetic expansion spree in the past few years, coinciding with the boom in the commercial real estate market. These stores will add to sales growth when the market recovers.
In the initial stages, however, fixed costs such as rentals, electricity and depreciation will depress overall margins. To compensate for this, retailers have been on a cost-cutting spree. Apart from looking inwards to cut costs, they have also been renegotiating rentals where possible, to lower their fixed costs. The next two quarters will give investors some idea on how well they recover. Expectations are running quite high.
Companies such Pantaloon and Shoppers Stop are trading at a price-earnings multiple of nearly 30 times their forecast 2010-11 earnings, based on consensus estimates. The room for disappointment, therefore, is rather high.
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